Crude oil prices bubbled following U.S. strikes on Iran nuclear sites over the weekend, leading shares of downstream OMCs to slip in trade on Monday, June 23. Further, Iran’s parliament approved a proposal to close the Strait of Hormuz, one of the world’s most critical oil shipping routes, which facilitates nearly 20 percent of global oil and LNG trade.
Brent crude prices jumped two percent to hover near $78/bbl, while WTI crude climbed 1.7 percent to $75/bbl, as a risk-off sentiment took hold.
When crude oil prices rise, shares of oil marketing companies often come under pressure, as their input costs increase but they may not be able to fully pass on the hike to consumers due to pricing regulations or demand concerns - impacting their profit margins.
On the other hand, oil exploration companies such as ONGC and Oil India benefit from higher crude prices, as they earn more per barrel produced while their costs remain largely fixed. As a result, investors expect better earnings from exploration firms, leading to gains in their stock prices.
At 9.20 am, HPCL's share price was lower by 0.7 percent at Rs 389.7, while BPCL's stock quoted Rs 311.45, also down 0.7 percent. Indian Oil shares were lower by 0.6 percent at Rs 137.76.
Upstream OMCs such as ONGC and Oil India defied the muted market sentiment. ONGC shares rose 60 basis points to Rs 253.35, while Oil India was half a percent higher to quote Rs 466.95.
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Earlier, Emkay Global noted that until the average of Brent crude prices stands at $75/bbl, the brokerage does not see any downside to its earnings estimates on HPCL, BPCL and IOCL. The continuation of the current earnings run-rate, reduction in international LPG prices, and payment of LPG subsidy is likely to offer a material upside potential for OMCs.
On the other hand, JM Financial maintained its 'buy' rating on ONGC and Oil India as they are key beneficiaries of high crude prices. According to the brokerage, the current market price of these stocks are discounting $65/bbl crude realisation; every $1/bbl higher oil price boost their EPS by 1.5-2 percent.
JM Financial also maintained its 'sell' tag HPCL/IOCL and 'hold' on BPCL as the brokerage believes OMCs’ risk-reward is not favourable given their aggressive capex plans and as valuations are 10-30 percent above the historical average.
"We expect OMCs’ integrated refining-cum-marketing margin to normalise around historical levels due to either sustained high crude price or government retaining benefit of any sustained fall in crude price via excise duty hike and/or cut fuel price to pass."
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